Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

BERGEN v. ROTHSCHILD

August 7, 1986

STEPHEN W. BERGEN and ANNE VIRGINIA BERGEN, Plaintiffs
v.
L.F. ROTHSCHILD, UNTERBERG, TOWBIN, and BENNETT MOSTEL, Defendants



The opinion of the court was delivered by: PENN

 This matter is before the Court on the defendants' motions to dismiss the amended complaint. *fn1" The defendants have filed separate but substantively similar motions. It is well established that a complaint should not be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). All well-pled allegations in the plaintiff's complaint must be accepted as true at this stage. Miree v. DeKalb County, 433 U.S. 25, 27 n. 2, 53 L. Ed. 2d 557, 97 S. Ct. 2490 (1976); Phillips v. Bureau of Prisons, 192 U.S. App. D.C. 357, 591 F.2d 966, 969 (D.C. Cir. 1979). Applying these stringent standards to this case, and for the reasons stated herein, the Court grants the motions in part, denies the motions in part, and orders certain allegations repleaded.

 The gravamen of this action is "churning". Plaintiffs allege that the defendants (a brokerage firm and its account executives) "devised and implemented a fraudulent scheme to generate commissions and margin interest from excessive, unnecessary and unsuitable trading activity in the plaintiffs' account." Count I of plaintiffs' Amended Complaint alleges violations of sections 10(b), 20(a), and 20(b) of the Securities Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a), and 78t(b); SEC Rule 10b-5, 17 C.F.R. § 240.10b-5; and SEC Rule 15cl-7, 17 C.F.R. § 240.15cl-7; Rule 405 of the New York Stock Exchange Act (NYSE); and Article III, Section 2 of the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (NASD). Count II alleges violations of 18 U.S.C. §§ 1341 (mail fraud), 1343 (wire fraud), and 1962(c) and (d) (RICO). Counts III and IV allege common law fraud and breach of fiduciary duty. Defendants have moved to dismiss all claims on a variety of grounds.

 a. The Federal Securities Law Claims (sections 10(b), 20(a), and 20(b)).

 Under federal securities law, "churning is cognizable as fraud." Russo v. Bache Halsey Stuart Shields, Inc., 554 F. Supp. 613, 617 (N.D. Ill. 1982). Churning involves "excessive trading of an investment account, without regard to the interests of the investor, for purposes of generating commissions for the broker and brokerage firm." Hecht v. Harris, Upham and Co., 430 F.2d 1202 (9th Cir. 1970). "It is the aggregation of transactions, excessive in number and effect, which constitutes the gravamen of the cause of action." Fey v. Walston & Co., 493 F.2d 1036, 1050 (7th Cir. 1974). Churning of securities constitutes a claim under 10(b) of the 1934 Act. Horne v. Francis I. du Pont & Co., 428 F. Supp. 1271, 1274 (D. D.C. 1977).

 A two year D.C. blue sky laws limitations period is prescribed by D.C. Code § 2-2613 for claims arising under SEC Rule 10b-5 and 10(b) of the Securities Exchange Act of 1934. Forrestal Village, Inc. v. Graham, 179 U.S. App. D.C. 225, 551 F.2d 411 (D.C. Cir. 1977). The last act of churning alleged in the amended complaint occurred in May of 1981. As this action was not filed until December 5, 1983, approximately two and one half years after the alleged violation, the defendants now seek dismissal of these claims on the grounds that they are time barred.

 Under the doctrine of equitable tolling:

 Smith v. Nixon, 196 U.S. App. D.C. 276, 606 F.2d 1183, 1190 (D.C. Cir. 1979), cert. denied, 453 U.S. 912, 101 S. Ct. 3147, 69 L. Ed. 2d 997 (1981); Fitzgerald v. Seamans, 180 U.S. App. D.C. 75, 553 F.2d 220, 228 (D.C. Cir. 1977). In opposition, the plaintiffs assert that the applicable limitations period was tolled on two grounds: (1) that churning is an inherently deceptive and self-concealing offense; and (2) that the defendants fraudulently concealed their actions.

 It is also well-established that an injured party has a positive duty to use diligence in discovering his cause of action within the limitations period. Fitzgerald, 553 F.2d at 228-229. See also Richards v. Mileski, 213 U.S. App. D.C. 220, 662 F.2d 65, 70-71 (D.C. Cir. 1981); Dayco Corp. v. Goodyear Tire & Rubber Co., 523 F.2d 389 (6th Cir. 1975). "Any fact that should excite his suspicion is the same as actual knowledge of the claim; the means of knowledge is the same thing, in effect, as the knowledge itself." Dayco, 523 F.2d at 394 citing Wood v. Carpenter, 101 U.S. 135, 143, 25 L. Ed. 807 (1879); Hobson v. Wilson, 237 U.S. App. D.C. 219, 737 F.2d 1, 35 (D.C. Cir. 1984).

 Thus, defendants counter citing SEC Rule 10b-5, 17 C.F.R. § 240.10b-10, which requires broker dealers to send written confirmations to customers, each time a purchase or sale of securities is made for their account. Defendants contend that plaintiffs' attempts to invoke the tolling doctrine must fail because the plaintiffs were "on notice" of all trading in their account.

 However, the rule is not dispositive. In determining whether churning has occurred, courts look to a variety of factors including:

 
(1) the number and frequency of the trades; (2) the amount of "in" and "out" trading; (3) the amount of commissions generated by the trading both in dollar terms and as a percentage of the broker's salary; (4) the investor's objectives in the market and his level of business sophistication; and (5) the degree of control exercised by the securities dealers over the investment account.

 Horne, 428 F. Supp. at 1274. "Evidence bearing upon the experience, sophistication, or trading naivete of the customer" is deemed of paramount importance. Fey, 493 F.2d at 1036. It follows that "the mere receipt of confirmations slips, does not, in itself, always provide sufficient notice to alert [an unseasoned] investor that the frequency and volume of trading might be considered excessive." Dzenits v. Merrill Lynch, Pierce, Fenner & Smith, 494 F.2d 168, 172 (10th Cir. 1974). Notwithstanding the receipt of confirmation slips, the tolling doctrine has often been applied "where concealment is supported by a combination of fiduciary duty and a layman's reliance upon an expert's advice." Fitzgerald, 553 F.2d at 228; see also Stevens v. Abbott, Proctor & Paine, 288 F. Supp. 836 (E.D. Va. 1968); *fn2" Weiser v. Shwartz, 286 F. Supp. 389 (E.D. La. 1968). *fn3"

 Two authorities, Stevens and Hecht are particularly illustrative. The Hecht court rejected the defendants' argument that there had been no withholding of information and that the plaintiff had facts within her knowledge constituting notice sufficient to bar her suit on limitations grounds, notwithstanding the fact that:

 
Plaintiff regularly received customary confirmation slips, showing each [transaction] as made and requesting immediate notice of [any] error . . . along with customary monthly statements for her account, [weekly] telephone contact [with the broker] . . . and that it was the practice of the plaintiff to put her confirmation slips on a table in her home, separating the buys from the sells, in order to discuss them with [her broker].

 Id. at 1207-1208. Finding that plaintiff's broker had not "explain[ed] basic considerations which would have indicated the amount of actual trading in the account," the court concluded that in view of the limitations on the plaintiff's competence, the information on hand was not sufficient to put her on notice of the excessive trading in her account -- until she was so advised by her tax accountants. *fn4" Id.

 Notwithstanding the trader's receipt of monthly statements and customary confirmation slips detailing each securities transaction as made, the Stevens court reached a similar conclusion. Many of the slips for secondary offers failed to show the commissions, mark-ups, or concessions paid to the broker. When the plaintiff had questioned her broker concerning the large number of transaction slips, he had encouraged her to destroy them. In view of "the plaintiff's lack of financial acumen," the court concluded that the plaintiff was not cognizant of the manner in which her account was being handled. Id. See also Goldenberg v. Bache & Company, 270 F.2d 675, ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.